Comcast-NBCU: The Strange Bedfellows at Year One

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Some laughed when old-school cable company sat down to play with content. Now, despite some costly ratings and box-office woes, the shareholders are laughing all the way to the bank

As the Comcast-NBC Universal merger mixing the monolithic cable company with film and TV assets hits its one-year mark, it would be hard to deny how effectively one hand is washing the other.

Not that everything has gone swimmingly since the Jan. 29, 2011 marriage. The Peacock's first fall season under the new ownership has been mostly a snooze, with a handful of the new offerings already canceled.

Despite a few hits, the box office has seen a string of flops, led by the costly "Cowboys & Aliens." And charges of discrimination still haunt the halls.

But Comcast's traditional cable operation — with an almost fully digital network in place and its combined video, voice and data customer growth proceeding nicely in low double digits — gives the company an ever-wider reach into America’s homes, while the core cable networks are unmatched in reach.

And the film studio and the network are part of a burgeoning On Demand content supply that includes 30,000 choices on TV, many more online, and a healthy supply on the XFINITY app.

What's more, there’s a comfortable logic in how the merged company handles its winnings. The NBCU cash flow is largely set aside to handle future payoffs to former owner G.E., while the Comcast side is pouring most if its cash into returning capital to shareholders — over $900 million worth.

“Our primary focus,” CEO Brian Roberts told Wall Street analysts and the usual online audience of shareholders in early November during a third-quarter earnings call, “has been on great operational execution and on extending our industry leadership.”

And by Street measures, it’s hard to find fault with the big picture over the past 12 months. As Standard & Poor’s entertainment analyst Tuna Amobi says, the company’s share price “has actually increased meaningfully since the deal was closed a year ago, it’s up about 15 percent in 12 months.”

THE BIG SCREEN

Though the film studio's marginally successful 2011 slate made it across the billion-dollar mark, you can't call it a terrific year. Hits including "Fast Five," which took in $626 million worldwide at the box office, were offset by a series of high-price flops like "Cowboys and Aliens" ($174.8 million worldwide on a $163 million budget) and “The Dilemma” ($69.7 million worldwide with a production budget of about the same.)

Still, the willingness of the brass to renew the deal of key film and parks honcho Ron Meyer through 2015—still reporting to Steve Burke, the NBC Universal CEO since the merger went through—and his able colleague and film chairman Adam Fogelson, who reupped through 2014 and is in turn keeping colleague Donna Langley on board with a re-up to 2014, demonstrates a certain faith in the future.

"The films figure has been very volatile, but I think they knew what they were buying," Amobi told TheWrap. "I wouldn't necessarily call the studio a disappointment; but it hasn't really been a factor so far. Yet that's no different from some of the other studios.”

The film division already scored one hit this year with the Mark Wahlberg-starring "Contraband," which eclipsed its production cost in its first weekend. And with big bets like summer’s "Battleship" and a couple offerings from Judd Apatow and his cabal, box office should improve this year.

THE SMALL SCREEN

With the demise of such entrants as “Free Agents,” “The Playboy Club” and “Prime Suspect” and the under-performance of “Whitney” and others shows, “We had a really bad fall,” entertainment chaairman Robert Greenblatt admitted at a Television Critics Association presentation recently. "Worse than I had hoped for, but about what I expected … we have a long road ahead of us, so bear with me."

But if the miseries of the primetime TV slate have served as what analysts call the “flip side” to the company’s other successes, insiders point out that the entire broadcast spectrum fares better when weighed as a Comcast whole.

Roberts can point to the status of longtime cable leader USA as boasting seven of the top 10 scripted series on basic cable, including “Royal Pains,” “Necessary Roughness” and “Burn Notice,” which have powered that network to double-digit gains over the previous year.

And in October the company’s Telemundo division in October bought the Spanish-language rights to the World Cup soccer finals for seven years, beginning in 2015. As the company is striving to catch up to Spanish language giant Univision (which holds 80 percent of the market compared to Telemundo’s 20 percent), and to fight off Fox’s newly launching Fox Mundo, the soccer franchise should serve as a real asset.

But even in broadcast, there are some bright spots on the horizon. "We're at the very start of a process that we all expect to take another three or four years," an NBCU spokesperson told TheWrap. "But we've taken a few first steps in the right direction with the big start for 'The Voice' last season and a couple new shows this season like 'Grimm' and 'Up All Night' … and we've got some very promising new shows including 'Smash' and 'Awake' coming the second half of the season."

Indeed, NBCU sees much riding on the success of the highly hyped "Smash," a "Glee"-like musical that follows the production of a fake Broadway musical based on the life of Marilyn Monroe. Though even if it tanks, Greenblatt said, “It isn't like we’re going into receivership.”

He added that “one of our many challenges is that fact that we have few strong lead-ins,” Greenblatt can be consoled by the fact that “"The Voice” will take off with turbo rockets by immediately following the Super Bowl, and on the Monday following, "Smash" will debut following "The Voice"'s 8-10 p.m. slot.

Not to mention the Super Bowl's record cornucopia of ad dollars based on a top rate of $4 million per 30-second spot. Finally, this year’s Summer Olympics on NBC, while a costly acquisition, should help the network promote a bevy of new shows (which they sorely need in time for the fall primetime season.)

With the robust ratings they’ve gotten from their sports programing raising the revenue for NBC, said Amobi, "what they've done is to demonstrate that this is a very, very valuable asset, which they got arguably at the bottom of the market when advertising was in the dumpster.”

NOR HAS THE ROAD BEEN FREE OF SQUABBLES

Amidst the growth, there have been legal stumbles, including criticism of the merged company’s handling of the Tennis Channel, which successfully sued to be treated on an equal basis with other Comcast sports programming.

The channel had sued over what it said was discrimination in favor of competing sports channels Versus and the Golf Channel. “We’ve built a significant business with a foot on our necks since day one," Tennis Channel CEO Ken Solomon told the New York Times, and said his channel would add over 20 million households under a late December ruling by an FCC administrative law judge.

Meanwhile, NBCU has been dogged by accusations it has thwarted diversity, with major African American figures like Oprah Winfrey (on behalf of her OWN network) and Russell Simmons (who had sought to buy the Style channel) complaining theirs were just the most visible of numerous minority enterprises the cable company has undervalued.

NBCU has vowed, publicly,and specifically to the FCC, to enhance diversity in its choices and employment practices: “Hopefully you will see statistics going in our favor as time goes on,” said NBC’s Greenblatt at the August TCA gathering.

Keenly aware of heeding the initial roadblocks the FCC and Department of Justice put before Comcast as the merger threatened to spread its tentacles through both distribution and content, the company on Thursday installed lawyer Lynn Charytan — a former legal colleague of high-ranking FCC operative William Lake — as vice president of a new group, Legal Regulatory Affairs.

MOVING FORWARD…

Something many observers didn’t factor into the original merger deal was the increasing retransmission reapings from payments for programming from various cable operators.

Those monies are starting to ramp up and throw off free cash that the company has used to pay more than $900 million in dividends, further boosting the stock. “With that tailwind of retransmission,” says Amobi, “and then you throw in the digital revenues from the likes of Netflix and Amazon and Hulu, you begin to see that NBC, will [accrue profit] and should be OK in the long term.”

A variety of other businesses the emerged company is pursuing demonstrate some efficiencies of scale:

>> In early December, SpectrumCo — a joint venture between Comcast, Time Warner Cable and Bright House Networks — was sold to Verizon Wireless, netting Comcast a profit of around $1.4 billion for its 63 percent share. Not only is that a nice score, noted Comcast Cable President Neil Smit, together with various Wi-Fi plans it gives the company a leg up on the mobile market, especially the key Xfinity services.

“This allows them to strike a deal that could enable Comcast to bundle Verizon Wireless 3G and 4G service into the Comcast Triple Play, which could make the bundle potentially more sticky," Amobi said. "A partner like Verizon all of a sudden opens up a lot of possibilities down the road — so that deal was applauded on Wall Street.”

>> Early this month, Comcast announced a joint deal with Disney to access the Mouse House's content — including ABC, ESPN, the Disney Channel and their related channels — for Xfinity subscribers to watch live or on-demand and across multiple platforms. In effect, that sets up a pay wall and helps shoulder the likes of Netflix and other middlemen out of the lucrative market for the Disney programming.

>> Comcast is party to what’s dubbed the “TV Everywhere” initiative, enabling cable subscribers to access their television favorites via online streaming, which innovation it’s been leading with others like Apple’s iPad juggernaut.

“So they're not sitting around on the cable system side waiting for Netflix and others to eat their lunch,” said Amobi. "You've got the whole theme of vertical integration, which, really, I doubted could come to fruition so quickly when the deal was announced."

Even the sober-sided Brian Roberts betrayed some enthusiasm on that one: “And so very, very exciting for the road map of innovation, when you move the brains out of the box into the cloud.”

For someone who came late to the content party as the industry version of a work-boots-on-the-ground cable guy — necessary but not that inspiring — Roberts, and his suitcase of synergy derived from Comcast, is definitely showing some moves.

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